Legal Definitions - clearings

In the context of banking, clearings refers to the financial instruments, most commonly checks, that are exchanged between banks for the purpose of processing and settling payments. These items are typically drawn on a bank within a specific geographic area and are presented either through a central clearing facility (often called a clearinghouse) or directly to the bank responsible for paying them. The process ensures that funds are transferred from the payer's account to the recipient's account.

Here are some examples to illustrate the concept of clearings:

• Example 1: Depositing a Personal Check

  Imagine Sarah writes a check from her account at "City Bank" to pay her landlord, Mr. Henderson, who banks with "Community Credit Union." When Mr. Henderson deposits Sarah's check into his account at Community Credit Union, that check becomes part of the daily clearings. Community Credit Union will then present this check, either directly or through a clearinghouse, to City Bank to request the funds from Sarah's account. The physical check, or its digital image, moving between these banks for payment is an item in the clearings process.

• Example 2: Business Payroll Checks

  A local manufacturing company issues weekly payroll checks to its 200 employees. These employees bank with various financial institutions across the city. When the employees deposit their paychecks into their respective banks, all these checks collectively enter the system as clearings. The various banks will then exchange these checks with each other, often through a central clearing system, to ensure that the funds are debited from the manufacturing company's account and credited to each employee's account at their individual banks.

• Example 3: Inter-Bank Exchange at a Clearinghouse

  At the end of a business day, "First National Bank" has received numerous checks drawn on "Regional Savings," while "Regional Savings" has also received many checks drawn on "First National Bank." Instead of sending each check individually, both banks participate in a local clearinghouse. They bundle all the checks drawn on the other bank and present them at the clearinghouse. The entire batch of checks exchanged between these banks through the clearinghouse for settlement purposes constitutes the clearings for that day, facilitating the efficient transfer of funds between their customers.